Question

On june 1 of year 1 doe company paid $1,800 cash for an insurance policy that would protect the company for one year. the company's fiscal closing date is december 31. based on this information alone, the amount of prepaid insurance and insurance expense shown on the year 2 financial statements would be

Answer 1

Calculation of amount of prepaid insurance and insurance expense shown on the year 2 financial statements;

It is given that on June 1 of year 1 the company paid $1,800 cash for an insurance policy for one year.

Hence the insurance expense for the first year shall be calculated for 7 months (June to December) = 1800*7/12 = $1050. The balance in the prepaid instance as on December 31 of the first year shall be (1800-1050) = $750

In the second year the insurance expense shall be $750 and at the end of the second year, the balance in the prepaid insurance shall be nil.